Preaching Tax Compliance

Sec. 501(c)(3)
restricts charities from influencing legislation or
intervening in any political campaign or from benefiting
insiders through private inurement. Ministers must tread
carefully to prevent their preaching from crossing into
politics. This issue defined a recent tax conflict involving
All Saints Episcopal Church in Pasadena, California.

The conflict highlighted the vagueness of the rules
governing what is acceptable, the cost that a church may
have to incur in defending itself, and the possible element
of political persecution.

The safest course for a
minister is to not preach about anything political. However,
drawing a line against political speech is difficult,
especially when the organization feels its primary mission
is at stake.

Facts

All Saints Episcopal
Church in Pasadena is one of Southern California’s largest
and most liberal churches, with 3,500 members. On October
31, 2004, the Rev’d George F. Regas delivered a sermon
titled, “If Jesus Debated Senator Kerry and President Bush.”
In the sermon, he depicted Jesus taking both candidates to
task for their positions on war, poverty, and abortion. It
appeared to be a typical All Saints antiwar, anti-poverty,
and pro-choice sermon. But it came just two days before the
presidential election. Though it castigated both candidates
and endorsed neither, it was interpreted by some as being a
bit harder on President Bush. An IRS employee read about the
sermon the following day in the Los Angeles Times,
and by June 2005, a probe had been initiated.

Sec.
7611 Restrictions

Church inquiries and examinations
are restricted by Sec. 7611, which requires a reasonable
belief by “an appropriate high-level Treasury official,”
based on “facts and circumstances recorded in writing,” that
the church may be carrying on an unrelated trade or business
or may not be tax exempt as a church. The items identified
as potential offenses must be explained in a notice to the
church of IRS concerns. Such an inquiry would provide the
church with an opportunity for a conference with regional
counsel at which it might dispel IRS concerns.

Only
after meeting these requirements can a formal IRS
examination begin. Such an examination can only review
records germane to determining whether the organization has
an unrelated business income tax liability or is entitled to
tax exemption as a church. The examination must be completed
within two years, and, absent special circumstances, a
church cannot be examined again for five years (Secs.
7611(c), (f)).

Otherwise, churches are subject to
the same restrictions as any other tax-exempt organization.
If violations are found, Sec. 4955 specifies penalties
against both the organization and its management. Auditing a
church is a serious matter, and unless there is unrelated
business income, real or imagined political persecution is
sometimes inferred.

IRS Investigation

All
Saints could probably have negotiated with the IRS to drop
its investigation in exchange for an advisory letter rather
than risk revocation of its tax-exempt status. Instead, the
church decided to challenge the IRS. It hired former IRS
Exempt Organizations Director Marcus Owens to represent it
and started a publicity campaign. All Saints argued that it
had engaged in free speech and had a history of being
“boldly political without being partisan.” It complained
that the IRS position that the sermon constituted
intervention in a political campaign would effectively
prohibit the church from preaching its core values in
connection with political issues. Marcus Owens asked whether
a pastor might discuss “thou shalt not kill” in the context
of the present Iraq war without adverse tax consequences
(letter to IRS Exempt Organization Specialist Pat
Schneiders, December 13, 2005).

An indefinite decision: After a
prolonged dispute, the IRS announced in September 2007 that
it was dropping the investigation, while at the same time
declaring victory. It said that the October 2004 sermon
ap-peared to be the only time the church had intervened in a
campaign and that the church had policies to prevent
partisan political activity. The Service recommended that
the church tell future guest speakers about the policy and
that it be careful about posting references to political
candidates on its website (2007 TNT 186-24, Doc. 2007-21641,
September 10, 2007). Fr. Regas’s sermon is still posted at
www.allsaints-pas.org/sermons/(10-31-04)%20If%20Jesus%20Debated.pdf.

There is no bright-line guidance from the IRS on this
topic, so confusion reigns. How much political speech is
allowed? The answer may be, as much as the political
atmosphere will tolerate, because no one really knows. IRS
Pub. 1828, Tax Guide for Churches and Religious
Organizations, notes that church leaders are “[not]
prohibited from speaking out about important issues of
public policy . . . [but] cannot make partisan comments in
official organization publications or at official church
functions.” But no clear definition of “partisan comments”
is provided, leaving it up to churches to try to conform to
an indefinite directive.

Conclusion

The
rules about what a church may preach on politics are quite
vague. The best advice is caution. When the IRS pursues a
church that is alleged to have engaged in political speech,
there are audit protections that should be aggressively
pursued (see Regs. Sec. 301.7611-1), tempered by the
possibility of reaching a settlement through an advisory
letter of reprimand. In addition, the cause of the audit
should be determined as well as any political angle that
might be exploited. The church should also be prepared to
pay potentially steep professional fees: All Saints spent
$275,000 in successfully challenging the IRS.

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

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